To what extent, the merger of public sector banks into one large entity can solve all or some of problems of the banking sector in India? Discuss critically.|
In case of public sector banks, bad loans as a ratio of the total loans are close to 10% and this may further increase due to twin balance sheet problem.
In order to create a strong bank government is planning merge banks. The merger of banks can help in geographical diversification and penetration of the new market.This can also help in efficiency because of better economies of scale and better rationalization. The big consolidated Bank can finance the infrastructural projects. After State Bank of India (SBI) merger government is considering other public sector banks merger with a goal to create global sized lenders.
However, the merger of public sector banks is not a panacea. Merged banks may lose the regional touch & may neglect the local needs, thereby reducing the credit supply for small borrowers.In a country of our size, there are opportunities for both types of banks regional as well as national banks.Also, the merger may reduce the choices of the customer as there will be less competition.
Therefore along with merger, the emphasis should be on improvement in governance & efficiency. The bank balance sheet should be strengthened. Pursuing the mergers without raising governance standards & strengthening their balance-sheets may be counterproductive.